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Additional Voluntary Contributions (AVC's)
Members of occupational pension schemes can purchase additional pension benefits by paying additional voluntary contributions (AVC's) into the scheme. AVC's can also be arranged outside of a scheme and these are known as 'freestanding AVC's'.
Asset
Anything that a person owns that has a financial value. Investment assets include cash (deposits), property, bonds and shares.
Bid price
The price at which an investor sells investments such as shares and units in investment funds.
Bonds
Large organisations, such as governments and companies can raise capital by issuing bonds. These are purchased by investors who are typically promised a return of their capital, at some fixed future date, and regular interest payments in the meantime. The level of interest paid will reflect the level of risk. UK Government 'gilt edged' bonds represent the lowest level of risk to an investor and accordingly pay a lower interest yield. At the other extreme and investor can receive a higher level of interest from 'junk' bonds, which are issued by companies where there is a higher risk of investors not receiving the promised amounts.
Capital Gains Tax (CGT)
A tax charged on the increase in value, on disposal, of certain assets. A disposal can include selling or gifting (either directly to another person or into a trust) an asset. There are many exemptions from CGT and these include sale of the family home, gifts between spouses or civil partners and gains on life assurance policies. There is also an annual CGT exemption which exempts from tax the first part of any taxable gains (this amount is set for each tax year).
Capital growth
The rise in value of any asset.
Capital protection
This is a guarantee which either a) protects an investment against future losses due to inflation or b) promises no loss on the original amount invested.
Compulsory Purchase Annuity
An annuity is an insurance contract, bought with a lump sum, that pays the purchaser an income for life. A compulsory purchase annuity is an annuity that is purchased, at retirement, from the pension funds accumulated within a defined contribution or money purchase arrangement.
The income received depends not only on the size of your pension fund, but also on the annuity rates available when the annuity is purchased. Rates differ between providers, and also vary according to life expectancy, interest rates and the benefits included in the policy. The older the purchaser is when they take out the annuity, the higher the rate (and therefore the higher the amount of income) as insurers don't expect to have to pay out for as long. Women are offered lower annuity rates than men of the same age, as they tend to live longer than men.
Coupon
The interest rate payable on a bond or gilt.
Dealing
The buying and selling of shares.
Dividend
The payment made by companies to shareholders out of profits. Interim dividends are paid part way through the financial year and authorised solely by company directors. Final dividends are proposed by directors each year but need to be approved by shareholders at the annual general meeting.
Dividend yield
The annual amount of income per share received from a company divided by its current share price. Put simply - how much income you are getting as a percentage of the value of your investments.
Emerging markets
This is a term given to the financial markets and economies of developing countries. These countries are emerging into the global marketplace, often on the back of rapid expansion and growth.
Equities
Another name for stocks and shares.
Final salary scheme
An occupational pension scheme where the benefits are based upon the member pay at, or near, retirement and also the number of years that they were in the scheme.
Friendly societies
These are mutually owned organisations which offer tax-exempt savings schemes, insurance plans and pensions. All assets are owned wholly by the society's investors.
FSA
The Financial Services Authority (FSA) - an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000, that regulates the financial services industry in the UK.
Fund manager
The person responsible for the day-to-day management of an investment fund to meet its objectives.
Gearing
This is a term used to describe the level of debt or borrowing within a company. It is often shown as a percentage amount based on the company's level of debt as a proportion of its shareholder capital.
Geographical sector
Investment funds that are specific to a certain country or geographic region are often grouped into geographical sectors (such as the UK, North America, Asia Pacific) for comparison purposes.
Gilts
The common name for HM Government gilt-edged securities. These are loans (or bonds) issued and backed by the Government.
Independent Financial Advisor (IFA)
A person who can provide advice on financial matters and can recommend suitable products from any provider.
Inflation
The change in the average cost of living over time, as measured in the UK by the Retail Prices Index.
Inheritance Tax (IHT)
This is a tax payable on the value of a person's assets on their death. It may also apply to some lifetime gifts. There are a number of IHT exemptions including assets left to the deceased's spouse or civil partner, bequests to charity and the value of certain businesses. There is also an IHT 'nil rate band' which exempts a specific amount from tax (the amount is set for each tax year) with IHT only payable on any excess amount above the nil-rate band figure.
Investment Risk
All investments carry an element of risk. A high-risk investment (such as shares in a start-up company or derivatives) often exposes the investor to the possibility of losing some or all of their original capital. They also offer the potential of making very attractive gains. At the other end of the risk scale, low-risk investments (such as savings accounts or cash ISAs from high street banks or building societies) provide greater capital protection but much lower rates of return.
An investor should always be aware of the level of risk attaching to any investment they are considering. The cautious investor will tend to favour the safer, low-risk, investments whilst the adventurous investor may have an appetite for higher-risk investments, as part of their overall portfolio.
Investment trust
A public limited company that is listed on the London Stock Exchange. It invests in the shares of other companies or in fixed-interest securities, unquoted securities or property, with the aim of producing a return for its shareholders.
Individual Savings Accounts (ISAs)
A tax-privileged form of investment, introduced by the Government in 1999 as a replacement for Personal Equity Plans (PEPs). Individuals are able to invest in cash ISAs (which are deposit accounts) and/or equity based ISAs. the Government sets the maximum amounts that may be invested for each tax year.
ISA investors are not liable to any income tax or capital gains tax on their investments although there is no ability to reclaim the notional 10% tax credit that accompanies dividends ion UK equities. ISAs are not exempt from inheritance tax and their value would form part of a deceased investor's estate, for the purposes of this tax.
Liability
In a financial context, a liability is typically an obligation to pay a sum of money to another party. A mortgage is a financial liability, where the borrower makes a legal commitment to make regular repayments and any outstanding capital sum in death or the end of a fixed term. On death, a person's liabilities are deducted from the assets to calculate the value of their estate.
Liquidity
This is a measure of how reliably and quickly an asset can be exchanged, by sale or purchase, without financial loss. Cash is the best example of an asset that is very liquid. Assets such as commercial properties, where finding an interested buyer prepared to pay the right price may take a considerable amount of time, are generally illiquid.
Market
A place where investments are traded such as the stock market, bond market or money markets.
Maturity date
The end date of certain investments (including bonds and life assurance savings policies) on which a payment becomes due to the owner.
Money purchase scheme
A pension arrangement where the accumulated funds on retirement are used to buy a compulsory purchase annuity. Also known as a defined contribution (dc) scheme.
Occupational pension
A scheme organised by an employer to provide pensions and other benefits for employees.
Offer price
The price at which an investor buys investments such as shares and units in investment trusts.
Ordinary shares
An ordinary share represents a part ownership of a company. Ordinary shares carry voting rights but no guaranteed amount of dividend payments. Ordinary shareholders are only entitled to all income and capital after the rights of all other classes of capital and creditors have been satisfied. Indices such as the FTSE 100 list the ordinary share prices for public limited companies (PLCs).
Pension Ombudsman
The Pension Ombudsman deals with complaints and disputes about entitlements and maladministration in pension schemes.
Personal pension
A defined contribution pension arrangement that can be taken out by an individual or an employer (a group personal pension). Contributions, subject to certain limits qualify for tax relief and the pension funds are not taxed on their income or gains. On retirement, benefits are based on the value of the fund and the annuity rates at that time. A tax-free lump sum may also be taken.
Preference shares
These represent ownership rights in a company that are less risky than ordinary shares. Shareholders have no voting rights in the company, usually receive a fixed rate of dividends and have priority over ordinary shareholders in the payment of dividends or capital, should the company become insolvent.
Real rate of return
This term is used to describe investment growth that has taken account of inflation. It can be simply calculated by deducting the rate of inflation from the actual rate of investment growth. For example, if an investment grew by 5% in a year and the published rate of inflation, for that same period was 3%, the real rate of return (the increase in spending power) would be 2%.
Redemption date
The date on which a bond is due to be redeemed (repaid) to the holder at its full face value. Some bonds include the year of redemption in their name.
Securities
A general name for all types of stocks, shares and bonds issued by companies.
State Pension
A pension payable, by the Government, to individuals reaching the state retirement age. The amount of State Pension is set each year. A pensioner will receive the full State Pension only if they had paid a sufficient number of National Insurance Contributions (NICs) during their working life. The amount of pension payable is scaled down for those who have not made the required number of NICs.
Terms
The restrictions or contractual conditions that apply to a policy such as a minimum and/or maximum sum or notice period for withdrawal.
The Pension Advisory Service (TPAS)
This service gives free help and advice to members on issues in connection with company occupational or personal pensions. If a dispute cannot be resolved with the fund's trustees, a member can contact TPAS by telephone on 0845 601 2923 or email enquiries@pensionsadvisoryservice.org.uk. Address: 11 Belgrave Road, London, SW1V 1RB. www.pensionadvisoryservice.org.uk(new window)
The Pensions Regulator (TPR)
An independent body that regulates work-based pension schemes. Its role is to protect members and promote good administration. It has the power to impose fines and orders on trustees and employers.
Yield
The annual return on a security which is measured as a percentage of its current price. For shares, this is usually based on the assumption that the next dividend payable will be the same as the last dividend paid.